An impending situation that is to result in federal tax increases and harsh budget cuts may be ineluctable. It has been dubbed the "Fiscal cliff." Fears are reasonably grounded that, because of it, a recession lies in the near future--and there are other entirely plausible beliefs that only a moderate economic decline is probable. The time is right to consider companies that can do well in a downturn, and effectively return capital to shareholders. This article discusses three such enterprises.
One thing that can be counted on, unless something is explicitly done via lawmaking, is an increase in the tax on dividends, from the existing rate of 15%, to as high as 44.6%. If it happens, some businesses are likely to stop paying them. Also, flight from high yielding equity could lower its prices.
Stocks that do not offer dividends are less likely to be harmed. Many investors who seek money from corporations may find a better case is made through carefully selected buyback plans. When stock is repurchased quarter after quarter, and the float consistently shrinks over time, a program is most shareholder-friendly. Further, earnings per share results become enhanced and grow. So, who can we turn to if confronted with a dubious economic future and reservations about income-oriented stocks?
Would there be any company better than AutoZone (NYSE:AZO)? For anyone who has watched this one go up and up faster and faster in the past it has been difficult to offer an explanation for not having a stake in it. Its ability to rapidly appreciate capital is partially attributed to its aggressive buybacks. Reference its chart with attention to the stock's performance during federal budget problems in the summer of 2011 and amidst persistent unemployment.
AZO data by YCharts
The repurchase program probably also helps those with sizable positions to sell. For example, former director Edward Lampert's liquidation of $1.5 billion in stock has only resulted in the share price climbing higher. In fact, multiple insiders have sold, and no substantial downward pressure has been observed.
As of this summer, the company's results have moderated, predicated by its competitors' reported slowing, particularly around The Great Lakes. On its most recent Conference Call, AutoZone CEO William C. Rhodes says that they are not sure why there is a regional slowdown, but believe it to be market wide. Business has also been consistently less robust in the plains and northeast. More excitingly, AutoZone has been slowly expanding in Mexico, where the economy is showing signs of improvement and the automotive industry is growing.
AZO appears to have traded sideways since around June, though it is difficult to argue that the underlying company is rivaled in its industry. While past performance is anything but a guarantee of future results, money managers have known that when people are on budgets they fix their own cars. Now, here is some detail about the buyback: the company reacquired 855,000 shares during its recently completed first quarter, and $788 million remains under its current authorization, enough to retire roughly another 2 million! Also, the leveling of the share price is favorable for the plan. There is no dividend to be affected by a sharp rise in taxes; and funds would be more effectively returned to shareholders through repurchasing.
AutoZone has been borrowing and there is criticism of its rising debt, which has increased 13.37% since last year. Yet, its credit rating is stable. For a nice pre-earnings summary that includes discussion of liabilities, review Strong Capital Allocation Makes Autozone A Buy.
Overall, what can be expected is an ever shrinking number of shares for a top company. Thus, the stock's recent decline on a second consecutive mediocre earnings report may present a remarkable opportunity to travel through any aggravated fiscal gridlock ahead.
Charles River Laboratories International, Inc. (NYSE:CRL) is a $1.87 billion small cap company. It lies within the health care industry, as it conducts laboratory tests to develop pharmaceuticals and medical treatments. Most drug companies face a dramatic decline in revenues when their products' patents expire, and CRL partners with them to develop their pipeline.
CRL data by YCharts
The stock has shown a 42% gain year to date; though a higher price typically does not present an advantageous time for a company to buy back shares; which is something Charles River Laboratories does. Yahoo! consensus analyst figures are reasonably on CRL's side. It trades at $38.71, next year's earnings are estimated at $3.01, and the forecast five year growth rate is 9.41%.
However, the mean analyst recommendation is 2.8. Further, unlike AZO, there is no reason to forecast anticyclical characteristics because a fading economy is not linked to rising sales for Charles River Laboratories. (Anyone who has a humane side may be concerned about how they use animals, as past cruelty has been documented.) Also, the company's recent Third Quarter Earnings Presentation specifies that the biopharma business is volatile and it expects its clients to restrain Fourth Quarter spending.
Management still predicts earnings per share growth [later] in 2013 and through 2015. If the share price drops, CRL could be a strong buy: it is another vehicle for capital appreciation that benefits from an increase in dividend taxes. This line of business should not be harmed by governmental budget cuts and tax increases. As of September 31, 2012, CRL has repurchased approximately 1.4 million shares, year to date, and has $73.5 million left under its authorization.
Liquidity is not an imminent concern. CRL reports $83,224 MM in cash and $543,143 MM in long term debt.
Virgin Media (NASDAQ:VMED) a British cable TV, broadband, and telecommunications service, has some amazing key statistics, to go along with an aggressive buyback plan. Such companies tend to be immune to widespread problems. It offers a small dividend, yielding 1.3%, that still can help investors with returns--even if 45% is foregone to taxation.
VMED data by YCharts
Currently selling at $35.51 per share, Yahoo! Analysts project next year's earnings to be $160.41, and assign it a five year growth rate of 53.8%. Reacquiring stock is a key attribute, and since mid-2010, nearly 24% of outstanding shares have been repurchased (Slide 18 Q3 2012 Investor Presentation)! The company plans to announce the next phase of its "Programme" in February, 2013.
There has been debate about whether or not the ability to afford an expensive mobile phone is an impediment to growing a subscriber base of persons who typically can not pay for contract service. Virgin Media reports a 21.77% year over year, steady decline in prepaid mobile service revenue. If there is merit to the argument, the trend may continue.
However, VMED has beaten earnings forecasts each quarter of 2012. It most recently has exhibited a 64% earnings surprise when reporting Third Quarter results on September 12. The stock now trades very close to its 52-week high; typically a situation that is not desirable for a stock repurchase program. The high share price is not a reason for a steep sell-off, and barring something unforeseen, it would be a surprise to see the stock pull back in the near future.
Liabilities may be a concern: VMED has ₤5,711 MM in long term debt, and only ₤113.4 MM in cash.
No one knows what is to transpire in the coming weeks and months. If income is a current strategy in the financial marketplace, a new tactic is worthy of consideration because a higher percentage of dividend payment may be subject to taxation. There is reason to believe that stocks that are not income-oriented can do well. Companies that decrease their number of shares available can be particularly attractive, and strong cases can be made for some of them.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AZO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.